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The 2024 slowdown will probably not be recession, though that’s certainly a possibility. I had previously predicted a recession, of mild magnitude, beginning in late 2023 or early 2024. This forecast retreats from that prediction. Why a recession did not materialize helps to understand the economic outlook going forward.

The usual time lag between changes in monetary policy and changes in the overall economy—spending, production and employment—is about one year. But lags can be longer or shorter, and every episode is unique. There are no cookie-cutter business cycles.

Reasons A Slowdown Was Delayed

Four factors explain a longer time lag for the negative effects of the Federal Reserve’s tightening. First, automobile and light truck sales usually fall when interest rates rise, leading to cutbacks in production. This time around, though we had pent-up demand for new cars due to past supply chain problems. Cars became more available in 2023 and prices even declined a bit. But with the pent-up demand mostly satisfied, look for sales to come down in 2024. That will be accentuated by a mis-match between production and demand for electric vehicles.

The second delay comes from business capital spending, which usually declines when the Fed tightens. Part of the decline results from the higher cost of capital, and part from weaker expectations for future demand that accompany monetary tightening. This cycle, however, companies had placed orders for computers, equipment and machinery to make up for workers they had trouble hiring.

The third delay also relates to the tight labor market. Some people who were laid off found new work right away, having driven past “help wanted” signs for months. That was not true for all people who had been displaced, but true enough to delay cutbacks in consumer spending.

And the fourth delay came from people who had been laid off or were worried about layoffs. The public had generally saved their pandemic stimulus payments, holding on to them for a year and then gradually spending down their bank balances. They have not had to cut back on their discretionary spending as much as in the typical business cycle. Households will have run out of their pandemic savings around mid-2024, but even then they will have the usual savings accumulated over the last few years.

Most of these four factors are purely delays, though the capital spending element may also soften the eventual downturn. Ideal economic policy in textbook theory adds stimulus when the economy is weak. The consumer savings, in particular, are being spent at a time when the economy would otherwise be weak. The same is true of the automobile sales pattern and business capital spending—they are occurring at just the right time, so the peak was cut down a little and the subsequent valley filled in.

Leading Indicators Mostly Green

Right now (December 2023) the economy continues to grow, with the leading indicators mostly positive. No statistical measure does a perfect job of predicting the economy’s path, as I’ve explained in the past. But taken together they can help anticipate the future.

Yield curve inversion is one of the best leading indicators, measuring whether short-term interest rates exceed long-term rates. The two most common methods both show inversion: the Fed Funds rate exceeds the 10-year Treasury Bond rate and the 2-year Treasury also exceeds the 10-year rate. This is the strongest negative right now.

Initial claims for unemployment insurance also does better at anticipating economic changes than most indicators. For the last two years claims have been almost perfectly flat at a level well below the long-run average. No sign of recession here, because jobs remain plentiful in general. (Some occupations are having difficulty, but not in sufficient quantity to constitute an economy-wide problem.)

The stock market often declines before a recession—but it also declines at other times. The latest stock market results (through late December 2023) portend better times ahead, not worse.

Another leading indicator that has been useful in the past is manufacturing purchasing managers who report faster delivery times (available from the Institute for Supply Management). That measure is still favorable for the economic outlook. It may also be less important as the economy has transitioned away from high dependence on manufacturing.

Reasons To Expect A Slowdown In 2024

Despite the generally favorable leading indicators, the sharp increase in interest rates (and reduction of the money supply) that we have had over the last two years should still trigger an economic slowdown. Growth will be positive but lower than the long-run average. Unemployment will probably rise by a little but go not terribly high. Inflation will continue declining to about the two-percent target set by the Federal Reserve.

The Fed will not feel strongly that it needs to cut interest rates, though they have stopped contemplating further increases. By mid-2024 they will probably bring short-term interest rates down to a neutral level. Their logic will be that they don’t need to adopt an easy-money policy, but they should not continue their past tight-money actions.

The economy faces risks, with geo-political concerns topping the list. The war in Israel shows Iran’s efforts to weaken U.S. allies, including Ukraine. Chinese pressure on Taiwan also justifies worries. The United States could be drawn into support for Guyana if Venezuela invades that country’s oil fields, leaving us vulnerable to other challenges.

Here at home, profligate spending by both parties threaten our financial system, though the crisis is probably a long way off. Add to that the usual animal spirits—people getting frightened and holding on to their money and companies becoming pessimistic about the value of capital spending.

That many of us economists predicted recession, which is not coming true right away, does not mean that a recession is impossible. Even if we’ve dodged that bullet, contingency plans for alternative economic scenarios are always good business policy.

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